Federal Register / Vol. 76, No. 12 / Wednesday, January 19, 2011 / Notices 3165 

1For purposes of this proposed exemption, 

references to section 406 of ERISA to refer as well 

to the corresponding provisions of section 4975 of 

the Code. 

DEPARTMENT OF LABOR 

Employee Benefits Security 

Administration 

Proposed Exemptions From Certain 

Prohibited Transaction Restrictions 

AGENCY: Employee Benefits Security 

Administration, Labor. 

ACTION: Notice of proposed exemptions. 

SUMMARY: This document contains 

notices of pendency before the 

Department of Labor (the Department) of 

proposed exemptions from certain of the 

prohibited transaction restrictions of the 

Employee Retirement Income Security 

Act of 1974 (ERISA or the Act) and/or 

the Internal Revenue Code of 1986 (the 

Code). This notice includes the 

following proposed exemptions: D– 

11580, Robert W. Baird & Co. 

Incorporated and its Current and Future 

Affiliates and subsidiaries (collectively, 

Baird); and D–11611, Security Benefit 

Mutual Holding Company (MHC) 

Benefit Life Insurance Company (SBL, 

and together with the Applicants), et al. 

DATES: All interested persons are invited 

to submit written comments or requests 

for a hearing on the pending 

exemptions, unless otherwise stated in 

the Notice of Proposed Exemption, 

within 45 days from the date of 

publication of this Federal Register 

Notice. 

ADDRESSES: Comments and requests for 

a hearing should state: (1) The name, 

address, and telephone number of the 

person making the comment or request, 

and (2) the nature of the person’s 

interest in the exemption and the 

manner in which the person would be 

adversely affected by the exemption. A 

request for a hearing must also state the 

issues to be addressed and include a 

general description of the evidence to be 

presented at the hearing. 

All written comments and requests for 

a hearing (at least three copies) should 

be sent to the Employee Benefits 

Security Administration (EBSA), Office 

of Exemption Determinations, Room N– 

5700, U.S. Department of Labor, 200 

Constitution Avenue, NW., Washington, 

DC 20210. Attention: Application 

No.lll, stated in each Notice of 

Proposed Exemption. Interested persons 

are also invited to submit comments 

and/or hearing requests to EBSA via email or FAX. Any such comments or 

requests should be sent either by e-mail 

to: moffitt.betty@dol.gov, or by FAX to 

(202) 219–0204 by the end of the 

scheduled comment period. The 

applications for exemption and the 

comments received will be available for 

public inspection in the Public 

Documents Room of the Employee 

Benefits Security Administration, U.S. 

Department of Labor, Room N–1513, 

200 Constitution Avenue, NW., 

Washington, DC 20210. 

Warning: If you submit written 

comments or hearing requests, do not 

include any personally-identifiable or 

confidential business information that 

you do not want to be publiclydisclosed. All comments and hearing 

requests are posted on the Internet 

exactly as they are received, and they 

can be retrieved by most Internet search 

engines. The Department will make no 

deletions, modifications or redactions to 

the comments or hearing requests 

received, as they are public records. 

SUPPLEMENTARY INFORMATION: 

Notice to Interested Persons 

Notice of the proposed exemptions 

will be provided to all interested 

persons in the manner agreed upon by 

the applicant and the Department 

within 15 days of the date of publication 

in the Federal Register. Such notice 

shall include a copy of the notice of 

proposed exemption as published in the 

Federal Register and shall inform 

interested persons of their right to 

comment and to request a hearing 

(where appropriate). 

The proposed exemptions were 

requested in applications filed pursuant 

to section 408(a) of the Act and/or 

section 4975(c)(2) of the Code, and in 

accordance with procedures set forth in 

29 CFR part 2570, subpart B (55 FR 

32836, 32847, August 10, 1990). 

Effective December 31, 1978, section 

102 of Reorganization Plan No. 4 of 

1978, 5 U.S.C. App. 1 (1996), transferred 

the authority of the Secretary of the 

Treasury to issue exemptions of the type 

requested to the Secretary of Labor. 

Therefore, these notices of proposed 

exemption are issued solely by the 

Department. 

The applications contain 

representations with regard to the 

proposed exemptions which are 

summarized below. Interested persons 

are referred to the applications on file 

with the Department for a complete 

statement of the facts and 

representations. 

Robert W. Baird and Co. Incorporated 

and Its Current and Future Affiliates 

and Subsidiaries (Collectively, Baird), 

Located in Milwaukee, Wisconsin 

[Application No. D–11580] 

Proposed Exemption 

The Department is considering 

granting an exemption under the 

authority of section 408(a) of the 

Employee Retirement Income Security 

Act of 1974 (ERISA or the Act) and 

section 4975(c)(2) of the Internal 

Revenue Code and in accordance with 

the procedures set forth in 29 CFR 2570, 

subpart B (55 FR 32836, 32847, August 

10, 1990). 

Section I. Transactions 

If the proposed exemption is granted, 

the restrictions of section 406(a) of the 

Act and the sanctions resulting from the 

application of section 4975 of the Code, 

by reason of section 4975(c)(1)(A) 

through (D) of the Code, shall not apply, 

effective October 9, 2009, to the cash 

sale (the Sale) by a Plan (as defined in 

Section II(d)) of an Auction Rate 

Security (as defined in Section II(b)) to 

Baird, provided that the following 

conditions are met: 1

(a) The Sale was a one-time 

transaction made on a delivery versus 

payment basis in the amount described 

in paragraph (b); 

(b) The Plan received an amount 

equal to par value of the Auction Rate 

Securities (the ARS or the Securities) 

plus accrued but unpaid income 

(interest or dividends, as applicable) as 

of the date of the Sale; 

(c) The last auction for the Securities 

was unsuccessful; 

(d) The Sale was made in connection 

with a written offer (the Offer) by Baird 

containing all of the material terms of 

the Sale; 

(e) The Plans did not bear any 

commissions or transaction costs with 

respect to the Sale; 

(f) The decision to accept the Offer or 

retain the Auction Rate Security was 

made by a Plan fiduciary or Plan 

participant or an individual retirement 

account (an IRA (as defined in Section 

II(d)) owner who is independent (as 

defined in Section II(c)) of Baird. 

Notwithstanding the foregoing, in the 

case of an IRA which is beneficially 

owned by an employee, officer, director 

or partner of Baird, the decision to 

accept the Offer or retain the Auction 

Rate Security may be made by such 

employee, officer, director or partner if 

all of the other conditions of this 

Section I have been met; 

(g) The Plan does not waive any rights 

or claims in connection with the Sale; 

(h) The Sale is not part of an 

arrangement, agreement or 

understanding designed to benefit a 

party in interest with respect to the 

Plan; 

(i) If the exercise of any of Baird’s 

rights, claims or causes of action in 

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3166 Federal Register / Vol. 76, No. 12 / Wednesday, January 19, 2011 / Notices 

connection with its ownership of the 

Securities results in Baird recovering 

from the issuer of the Securities, or any 

third party, an aggregate amount that is 

more than the sum of: 

(1) The purchase price paid to the 

Plan for the Securities by Baird; and 

(2) The income (interest or dividends, 

as applicable) due on the Securities 

from and after the date Baird purchased 

the Securities from the Plan, at the rate 

specified in the respective offering 

documents for the Securities or 

determined pursuant to a successful 

auction with respect to the Securities, 

Baird will refund such excess amount 

promptly to the Plan (after deducting all 

reasonable expenses incurred in 

connection with the recovery); 

(j) Neither Baird nor any affiliate 

exercises investment discretion or 

renders investment advice (within the 

meaning of 29 CFR 2510.3–21(c)) with 

respect to the decision to accept the 

written Offer or retain the Security 

(unless the Sale involves an IRA whose 

owner is an employee, officer, director 

or partner of Baird); 

(k) Baird and its affiliates, as 

applicable, maintain, or cause to be 

maintained, for a period of six (6) years 

from the date of the Sale such records 

as are necessary to enable the person 

described below in paragraph (l)(i), to 

determine whether the conditions of 

this proposed exemption, if granted, 

have been met, except that— 

(i) No party in interest with respect to 

a Plan which engages in a Sale, other 

than Baird and its affiliates, shall be 

subject to a civil penalty under section 

502(i) of the Act or the taxes imposed 

by section 4975(a) and (b) of the Code, 

if such records are not maintained, or 

not available for examination, as 

required, below, by paragraph (l)(i); 

(ii) A separate prohibited transaction 

shall not be considered to have occurred 

solely because due to circumstances 

beyond the control of Baird, such 

records are lost or destroyed prior to the 

end of the six-year period. 

(l)(i) Except as provided, below, in 

paragraph (l)(ii), and notwithstanding 

any provisions of subsections (a)(2) and 

(b) of section 504 of the Act, the records 

referred to, above, in paragraph (k) are 

unconditionally available at their 

customary location for examination 

during normal business hours by— 

(A) Any duly authorized employee or 

representative of the Department, the 

Internal Revenue Service, or the 

Securities and Exchange Commission; 

(B) Any fiduciary of any Plan that 

engages in the covered transactions, or 

any duly authorized employee or 

representative of such fiduciary; 

(C) Any employer of participants and 

beneficiaries and any employee 

organization whose members are 

covered by a Plan that engages in the 

covered transactions, or any authorized 

employee or representative of these 

entities; or 

(D) Any IRA owner, participant or 

beneficiary of a Plan that engages in the 

Sale, or duly authorized representative 

of such IRA owner, Plan participant or 

beneficiary; 

(ii) None of the persons described, 

above, in paragraph (l)(i)(B)–(D) shall be 

authorized to examine trade secrets of 

Baird, or commercial or financial 

information which is privileged or 

confidential; and 

(iii) Should Baird refuse to disclose 

information on the basis that such 

information is exempt from disclosure, 

Baird shall, by the close of the thirtieth 

(30th) day following the request, 

provide a written notice advising that 

person of the reasons for the refusal and 

that the Department may request such 

information. 

Section II. Definitions 

(a) The term ‘‘affiliate’’ of another 

person means: Any person directly or 

indirectly, through one or more 

intermediaries, controlling, controlled 

by, or under common control with such 

other person; 

(b) The term ‘‘Auction Rate Security’’ 

means a security: 

(1) That is either a debt instrument 

(generally with a long-term nominal 

maturity) or preferred stock; and 

(2) with an interest rate or dividend 

that is reset at specific intervals through 

a ‘‘Dutch Auction’’ process. 

(c) The term ‘‘Independent’’ means a 

person who is not Baird or an affiliate 

(as defined in Section II(a)). 

(d) The term ‘‘Plan’’ means an 

individual retirement account or similar 

account described in section 

4975(e)(1)(B) through (F) of the Code (an 

IRA); or an employee benefit plan as 

defined in section 3(3) of the Act. 

Effective Date: If this proposed 

exemption is granted, it will be effective 

October 9, 2009. 

Summary of Facts and Representations 

1. Founded in 1919, Robert W. Baird 

& Co. Incorporated (‘‘Baird’’) is an 

employee-owned wealth management, 

capital markets, asset management and 

private equity firm. With its 

headquarters in Milwaukee, Wisconsin, 

Baird has offices in the United States, 

Europe and Asia. Baird is a registered 

broker-dealer under the Securities 

Exchange Act of 1934 and a member of 

the Financial Industry Regulatory 

Authority. Baird is also a federally 

registered investment adviser. It 

provides trade execution, custody and 

other standard brokerage services, as 

well as investment advice and asset 

management services to individual, 

trust, institutional, corporate and other 

clients, including pension, profitsharing and retirement plans and 

accounts. 

2. In October 2009, Baird 

communicated in writing to its clients, 

including the Plans, its offer (the Offer) 

to purchase certain auction rate 

securities (i.e., the Securities) for an 

amount equal to the par value of the 

applicable Security, plus any accrued 

and unpaid income (interest or 

dividends, as applicable) thereon. The 

purchase transactions occurred on the 

first regular auction date for the 

applicable Security that followed the 

Plan’s submission to Baird of its written 

acceptance of the Offer. 

3. The Plans that have so far 

purchased the Securities from Baird 

pursuant to the Offer include sixty-six 

Individual Retirement Accounts (IRAs), 

subject to section 4975 of the Code, for 

which Baird serves as a nonbank 

custodian or trustee. 

4. Baird represents that the Securities 

are debt or preferred equity auction rate 

securities issued with an interest or 

dividend rate that is reset on a regular 

basis (generally between every 7 and 35 

days) through a ‘‘Dutch Auction’’ 

process. Historically, by means of such 

auction process, the interest or dividend 

rate was periodically adjusted to a level 

at which demand for the Security 

depleted the available supply at a 

purchase price equal to the par value of 

the Securities. In this way, the auctions 

served as a form of secondary market for 

the Securities, by providing liquidity at 

par on a regular, periodic basis to any 

holder who wished to sell the 

Securities. The applicant represents that 

the Securities were frequently 

purchased by, or for the benefit of, 

clients seeking a reasonable short-term 

return and a high degree of liquidity. 

5. If an auction for one of the 

Securities fails (e.g., because there is 

insufficient demand for the Security), 

the interest or dividend rate will be 

reset to the ‘‘maximum rate’’ or ‘‘failed 

auction rate’’ (in either case, ‘‘default 

rate’’) for that Security as specified in 

the offering documents for such 

Security. In some cases, the default rate 

changes from time to time as specified 

in the relevant documents. 

6. Baird states that auctions for the 

Securities have failed consistently since 

approximately February, 2008. In 

addition, because the auctions have 

failed consistently since February, 2008 

and given the absence of any other 

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Federal Register / Vol. 76, No. 12 / Wednesday, January 19, 2011 / Notices 3167 

2For purposes of this proposed exemption, 

references to the provisions of Title I of the Act, 

unless otherwise specified, refer also to the 

corresponding provisions of the Code. 

meaningful secondary market for the 

Securities, the Securities no longer 

provide the liquidity that had been 

anticipated when they were acquired. 

The proposed exemption, if granted, 

will be retroactive to October 9, 2009, 

the date of the written Offer by Baird to 

acquire the Securities from the Plans. 

7. Baird represents that the Securities 

that were held by the IRAs were issued 

by a variety of issuers. 

8. Generally, the IRAs purchased the 

Securities through Baird or another 

broker-dealer. 

9. Baird states that the terms of the 

Offer expressly provided that a client is 

not obligated to sell Securities and must 

affirmatively agree to enter into a sale of 

Securities to Baird, (i.e., a Sale). Baird 

represents that any IRA’s decision to 

sell the Securities to Baird pursuant to 

its Offer has been made by the IRA 

owner. 

10. Baird estimates that the total 

aggregate par value plus accrued and 

unpaid income (interest or dividends, as 

applicable) thereon for Securities held 

by the IRAs represent $8.125 million. 

11. Baird represents that the Sale of 

the Securities by an IRA benefited the 

IRA because of the IRA’s inability to sell 

the Securities at par as a result of 

continuing failed auctions. In addition, 

Baird states that each transaction was a 

one-time Sale for cash in connection 

with which such IRA did not bear any 

brokerage commissions, fees or other 

expenses. 

12. Baird states that, pursuant to the 

terms of the Offer, the Sale of Securities 

by an IRA to Baird resulted in an 

assignment of all of the IRA’s rights, 

claims, and causes of action against an 

issuer or any third party arising in 

connection with or out of the client’s 

purchase, holding or ownership of the 

Securities. This assignment did not 

include any rights, claims or other 

causes of action against Baird. Rather, 

such assignment was limited to rights, 

claims and causes of action against the 

issuers of the Securities and any third 

parties unrelated to Baird. This has been 

the case at all times with respect to the 

subject Securities from the date as of 

which retroactive relief has been 

requested. Baird states further that if the 

exercise of any of the foregoing rights, 

claims or causes of action results in 

Baird recovering from the issuer or any 

third party an aggregate amount that is 

more than the sum of (a) the purchase 

price paid for the Securities by Baird 

and (b) the income (interest or 

dividends, as applicable) due on the 

Securities from and after the date on 

which Baird purchased the Securities 

from the IRA, Baird will refund such 

excess amount promptly to the IRA 

(after deducting all reasonable expenses 

incurred in connection with the 

recovery). 

13. In summary, Baird represents that 

the transactions satisfied the statutory 

criteria of section 4975(c)(2) of the Code 

because: (a) Each Sale was a one-time 

transaction for cash; (b) each IRA 

received an amount equal to the par 

value of the Securities, plus accrued but 

unpaid income (interest or dividends, as 

applicable), which was beneficial to the 

IRA due to the IRA’s inability to sell the 

Securities at par because of continuing 

failed auctions; (c) no IRA paid any 

commission or other transaction 

expenses with respect to the Sale; (d) 

each IRA voluntarily entered into the 

Sale, as determined in the discretion of 

the IRA owner; and (e) Baird will 

promptly refund to the applicable Plan 

any amounts recovered from the issuer 

or any third party in connection with its 

exercise of any rights, claims or causes 

of action as a result of its ownership of 

the Securities, if such amounts are in 

excess of the sum of (i) the purchase 

price paid for the Securities by Baird 

and (ii) the income (interest or 

dividends, as applicable) due on the 

Securities from and after the date on 

which Baird purchased the Securities 

from the Plan, at the rate specified in 

the offering documents for the ARS or 

determined pursuant to a successful 

auction with respect to the Securities. 

FOR FURTHER INFORMATION CONTACT: Mr. 

Gary H. Lefkowitz of the Department, 

telephone (202) 693–8546. (This is not 

a toll-free number.) 

Security Benefit Mutual Holding 

Company (MHC) and Security Benefit 

Life Insurance Company (SBL, and 

Together With MHC, the Applicants), 

Located in Topeka, Kansas 

[Application No. D–11621] 

Proposed Exemption 

Based on the facts and representations 

set forth in the application, the 

Department is considering granting an 

exemption under the authority of 

section 408(a) of the Act (or ERISA) and 

section 4975(c)(2) of the Code and in 

accordance with the procedures set 

forth in 29 CFR Part 2570, Subpart B (55 

FR 32836, 32847 August 10, 1990). 

Section I. Covered Transaction 

If the exemption is granted, the 

restrictions of section 406(a) of the Act 

and the sanctions resulting from the 

application of section 4975 of the Code, 

by reason of section 4975(c)(1)(A) 

through (D) of the Code,2 shall not 

apply, effective July 30, 2010, to the 

receipt of cash or policy credits (Policy 

Credits), by or on behalf of a policy 

owner of SBL that is an eligible member 

(Eligible Member), which is an 

employee benefit plan or retirement 

arrangement that is subject to section 

406 of the Act and/or section 4975 of 

the Code (a Plan), other than a Plan 

maintained by MHC and/or its affiliates, 

in exchange for the extinguishment of 

such Eligible Member’s membership 

interest in MHC, in accordance with the 

terms of a plan of demutualization and 

dissolution (the D&D Plan), adopted by 

MHC and implemented in accordance 

with Kansas Insurance Law. 

This proposed exemption is subject to 

the general conditions set forth below in 

Section II. 

Section II. General Conditions 

(a) The D&D Plan was implemented in 

accordance with procedural and 

substantive safeguards that were 

imposed under the laws of the State of 

Kansas and was subject to review, 

approval, and supervision by the Kansas 

Commissioner of Insurance (the 

Commissioner). 

(b) The Commissioner reviewed the 

terms that were provided to Eligible 

Members as part of such 

Commissioner’s review of the D&D Plan, 

and the Commissioner approved the 

D&D Plan following a determination 

that such D&D Plan was fair and 

equitable to all Eligible Members. 

(c) Each Eligible Member had an 

opportunity to comment on the D&D 

Plan at the Commissioner’s public 

comment meeting or evidentiary hearing 

on the D&D Plan. 

(d) Each Eligible Member had an 

opportunity to vote to approve the D&D 

Plan after full written disclosure was 

given to the Eligible Members by MHC. 

(e) Pursuant to the D&D Plan, an 

Eligible Member generally received 

cash, except that an Eligible Member 

received Policy Credits, and not cash, to 

the extent that— 

(1) Consideration was allocable to the 

Eligible Member based on ownership of 

a Tax-Qualified Contract; or 

(2) SBL made an objective 

determination that payment of 

Consideration in the form of cash would 

be disadvantageous to such Eligible 

Member in respect of applicable income 

or other taxation provisions. 

(f) Any determination made by SBL 

under Paragraphs (e)(1) or (e)(2) above 

was based upon objective criteria that 

was applied consistently to similarly 

situated Eligible Members. 

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3168 Federal Register / Vol. 76, No. 12 / Wednesday, January 19, 2011 / Notices 

(g) Any act or determination 

undertaken by an Eligible Member that 

was a Plan with respect to attending 

and/or submitting comments for the 

Commissioner’s public comment 

meeting and/or evidentiary hearing, 

attending MHC’s special meeting to 

consider the D&D Plan, and/or voting on 

the D&D Plan, was made by one or more 

Plan fiduciaries that were independent 

of SBL and its affiliates, and neither SBL 

nor any of its affiliates provided 

investment advice within the meaning 

of 29 CFR 2510.3–21(c) or exercised 

investment discretion with respect to 

such act or determination. 

(h) All Eligible Members that were 

Plans participated in the 

demutualization of MHC (the 

Demutualization) on the same basis as 

all other Eligible Members that were not 

Plans. 

(i) No Eligible Member paid any 

brokerage commissions or fees in 

connection with the receipt of Policy 

Credits. 

(j) All of SBL’s policyholder 

obligations remained in force and were 

not affected by the D&D Plan. 

(k) The terms of the Demutualization 

were at least as favorable to the Plans as 

the terms of an arm’s length transaction 

between unrelated parties. 

(l) Any Plan Eligible Member whose 

Consideration was placed in a trust, 

escrow account, or other similar 

arrangement (the Escrow Arrangement), 

pursuant to the D&D Plan, will receive 

a distribution of such Consideration 

from the Escrow Arrangement, and will 

not forfeit such Consideration. 

(m) SBL maintains or causes to be 

maintained, for a period of (6) six years, 

the records necessary to enable the 

persons described in paragraph (n)(1) of 

this section to determine whether the 

applicable conditions of this exemption 

have been met. Such records are readily 

available to assure accessibility by the 

persons identified in paragraph (n)(1) of 

this section. 

(n)(1) Notwithstanding any provisions 

of section 504(a)(2) and (b) of the Act, 

the records referred to in paragraph (m) 

of this section are unconditionally 

available at their customary location for 

examination during normal business 

hours by— 

(A) Any duly authorized employee or 

representative of the Department or the 

Internal Revenue Service; 

(B) Any fiduciary of an Eligible 

Member that is a Plan or any duly 

authorized representative of such 

fiduciary; 

(C) Any contributing employer to any 

Eligible Member that is a Plan or any 

duly authorized employee 

representative of such employer; and 

(D) Any participant or beneficiary of 

any Eligible Member that is a Plan, or 

any duly authorized representative of 

such participant or beneficiary. 

(2) A prohibited transaction is not 

deemed to have occurred if, due to 

circumstances beyond the control of 

SBL, the records are lost or destroyed 

prior to the end of the six-year period, 

and no party in interest other than SBL 

is subject to the civil penalty that may 

be assessed under section 502(i) of the 

Act or to the taxes imposed by sections 

4975(a) and (b) of the Code if the 

records are not maintained or are not 

available for examination as required by 

paragraph (n)(1) of this section. 

(3) None of the persons described in 

paragraphs (B)–(D) of section (n)(1) are 

authorized to examine the trade secrets 

of SBL or commercial or financial 

information which is privileged or 

confidential. 

(4) Should SBL refuse to disclose 

information on the basis that such 

information is exempt from disclosure, 

SBL shall, by the close of the thirtieth 

(30th) day following the request, 

provide written notice advising that 

person of the reason for the refusal and 

that the Department may request such 

information. 

Section III. Definitions 

For purposes of this proposed 

exemption: 

(a) The term ‘‘MHC’’ means Security 

Benefit Mutual Holding Company, and 

any affiliate of MHC, as defined below 

in Section III(b). 

(b) An ‘‘affiliate’’ of a person 

includes— 

(1) Any person directly or indirectly 

through one or more intermediaries, 

controlling, controlled by, or under 

common control with such entity (for 

purposes of this paragraph, the term 

‘‘control’’ means the power to exercise a 

controlling influence over the 

management or policies of a person 

other than an individual); and 

(2) Any officer of, director of, or 

partner in such person. 

(c) The ‘‘Adoption Date’’ refers to 

March 2, 2010, the date that MHC’s 

Board of Directors adopted the D&D 

Plan. 

(d) The term ‘‘Consideration’’ means 

the cash or Policy Credits receivable by 

an Eligible Member in exchange for the 

extinguishment of such Eligible 

Member’s membership interest in MHC, 

in accordance with the terms of the D&D 

Plan. 

(e) The ‘‘D&D Plan’’ means the plan of 

demutualization and dissolution 

adopted by MHC and implemented in 

accordance with Kansas Insurance Law, 

dated as of March 2, 2010. 

(f) The term ‘‘Eligible Member’’ means 

a person, other than MHC or its 

subsidiaries, who, as reflected in the 

records of SBL or other relevant entities, 

is the owner of one or more Eligible 

Policies on the Adoption Date. 

(g) The term ‘‘Eligible Policy’’ or 

‘‘Eligible Policies’’ means a policy that, 

as reflected in the records of SBL or 

other relevant entities, is in force on the 

Adoption Date, unless the policy is 

excluded pursuant to the D&D Plan. 

(h) The term ‘‘Policy Credit’’ means 

consideration to be paid in the form of 

an increase in cash value, account 

value, dividend accumulations or 

benefit payment, as appropriate, 

depending upon the policy. 

(i) The term ‘‘SBL’’ means Security 

Benefit Life Insurance Company and 

any affiliate of SBL, as defined in 

Section III(b). 

(j) The term ‘‘Tax-Qualified Contract’’ 

means an Eligible Policy in one of the 

following forms, that is held, other than 

through a trust, on the date that 

Consideration is distributed— 

(1) An annuity contract that qualifies 

for the treatment described in section 

403(b) of the Code; 

(2) An individual retirement annuity 

within the meaning of section 408(b) of 

the Code; 

(3) An individual annuity contract or 

an individual life insurance policy 

issued directly to a Plan participant 

pursuant to a Plan qualified under 

section 401(a) or section 403(a) of the 

Code; 

(4) A group annuity contract issued to 

an employer, designed to fund benefits 

under a Plan sponsored by the employer 

that qualifies under section 401(a) or 

section 403(a) of the Code; 

(5) An annuity contract issued in 

connection with a Plan established by a 

governmental entity that qualifies for 

the treatment described in section 457 

of the Code; or 

(6) Any other form of contract MHC 

determines must receive Policy Credits 

in order to retain the contract’s taxfavored status. 

Section IV. Effective Date 

If granted, this proposed exemption 

will be effective as of July 30, 2010. 

Summary of Facts and Representations 

MHC and Affiliated Entities 

1. MHC, which is no longer in 

existence, was the Topeka, Kansasbased, former common parent of a 

consolidated group of companies that 

included Security Benefit Corporation 

(SBC), which in turn was the parent 

corporation of a consolidated group of 

companies that included Security 

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3MHC wholly owned SBC, which in turn was the 

common parent corporation of SBL, First Security 

Benefit Life Insurance and Annuity Company of 

New York, Security Financial Resources, Inc. SFR), 

Security Distributors, Inc., Rydex Holdings, LLC, 

Security Investors, LLC, Security Global Investors, 

LLC, and se2, Inc. 

Benefit Life Insurance Company (SBL).3

MHC was formed in 1998 as a mutual 

holding company for SBL and its 

affiliates. At the time of MHC’s 

formation, SBL converted from a mutual 

life insurance company to a stock life 

insurance company within a mutual 

holding company structure pursuant to 

a plan of conversion (the Prior 

Conversion). The Prior Conversion had 

the effect of separating policyholders’ 

contract rights and membership 

interests under SBL’s policies such that 

the contract rights under the policies 

remained with SBL and the membership 

interests transferred to MHC. 

2. As a mutual holding company, 

MHC could not issue common or 

preferred stock. Instead, SBL 

policyholders, by reason of their 

ownership of SBL policies, became 

members of MHC (the Members) and 

had certain rights under Kansas law. 

These rights (Membership Interests) 

entitled the Members to vote on 

members of the Board of Directors of 

MHC and on extraordinary transactions 

and to receive assets in the event of the 

demutualization, dissolution or 

liquidation of MHC. The rights inherent 

in each Membership Interest were 

created by operation of Kansas law 

solely as a result of the policyholder’s 

acquisition of the underlying SBL 

policy. Further, if an SBL policyholder 

surrendered his or her SBL policy, or if 

the contract terminated by the payment 

of benefits to the policy beneficiary, the 

policyholder’s Membership Interest 

would terminate without payment of 

any consideration. 

3. The Applicants explain that, as a 

mutual insurance holding company, 

MHC was not authorized to engage in 

the business of insurance. It was also 

not authorized to pay dividends or to 

make any other distributions or 

payments of income or profit, except as 

was directed or approved by the 

Commissioner or was provided by 

MHC’s Articles of Incorporation in the 

event of MHC’s liquidation or 

dissolution. 

4. SBL, a direct wholly-owned 

subsidiary of SBC and an indirect 

wholly-owned subsidiary of MHC, is the 

largest Kansas-domiciled stock life 

insurance company, and is licensed to 

sell insurance products in every state 

except New York. Also based in Topeka, 

Kansas, SBL was founded in 1892 and 

became a mutual life insurance 

company in 1950, assuming its present 

name. SBL remained a mutual life 

insurance company until it converted to 

a stock company within a mutual 

holding company structure in 1998 in 

the Prior Conversion. 

5. According to the Applicants, a 

major part of SBL’s business involves 

the sale of (a) Annuity contracts that are 

held as part of tax-qualified and taxsheltered retirement plans described in 

section 401(a), section 403(a), and 

section 403(b) of the Code, (b) annuities 

as part of individual retirement 

accounts or as individual retirement 

annuities described in section 408 of the 

Code and (c) annuity contracts held as 

part of plans described in section 457 of 

the Code. The Applicants represent that 

certain affiliates of MHC and SBL 

provide services to retirement plans, 

including SFR, which provides 

recordkeeping and related nondiscretionary administrative services to 

retirement plan policyholders of SBL. 

The Applicants state that the SBL 

policyholders do not include any plans 

sponsored by MHC, SBL and/or any of 

their respective affiliates. 

The Party in Interest Relationship/ 

Request for Exemptive Relief 

6. The Applicants represent that 

neither MHC nor SBL is a ‘‘party in 

interest,’’ as that term is defined in the 

Act, with respect to any Eligible 

Member which is an employee benefit 

plan or retirement arrangement that is 

subject to section 406 of the Act and/or 

section 4975 of the Code merely because 

SBL has issued an insurance policy to 

such Plan. However, according to the 

Applicants, affiliates of MHC and SBL 

provide a variety of services to Plans 

that are Eligible Members. The 

Applicants state that the provision of 

such services may cause MHC and/or 

SBL, due to their relationship with the 

service providers, to be parties in 

interest with respect to such Plans by 

reason of the derivative provisions of 

section 3(14) of the Act. 

7. The Applicants note that, as a 

practical matter, it is not possible to 

identify all of the party in interest 

relationships that may exist between 

MHC and SBL and the Plans. 

Accordingly, the Applicants are seeking 

a broad exemption from the prohibited 

transaction restrictions of the Act in 

order to resolve inadvertent prohibited 

transactions that may occur in 

connection with implementation of the 

D&D Plan. As such, the Applicants have 

requested exemptive relief to cover the 

receipt of cash or Policy Credits by both 

trusteed and non-trusteed Plans upon 

the extinguishment of their existing 

Membership Interests in MHC, which 

may be viewed as a prohibited sale or 

exchange of property between such Plan 

and MHC and/or SBL in violation of 

section 406(a)(1)(A) of the Act and 

could also be construed as a transfer of 

plan assets to, or a use of plan assets by 

or for the benefit of, a party in interest 

in violation of section 406(a)(1)(D) of the 

Act. If granted, the exemption will be 

effective as of July 30, 2010. 

The Decision To Demutualize 

8. The Applicants state that, as of 

December 31, 2009, SBL’s policyholder 

surplus, as reflected in its statutory 

financial statement, was approximately 

$427 million. Furthermore, SBL’s 

financial strength rating from Standard 

& Poor’s Ratings Services, a Standard & 

Poor’s Financial Services, LLC business 

(S&P), as of February 26, 2010, was 

‘‘BB+.’’ The Applicants represent that 

SBL’s capital and surplus position 

deteriorated significantly in 2008 and 

2009 as a result of, among other things, 

realized and unrealized losses on 

collateralized debt obligations and other 

investments. According to the 

Applicants, when combined with the 

impact of lower equity markets on 

revenues and reserve requirements, 

these losses resulted in a decline of 

more than 50% in SBL’s capital and 

surplus between the middle of 2008 and 

September 30, 2009. 

9. In response to the deterioration of 

SBL’s financial condition in 2008 and 

2009, MHC’s Board of Directors 

considered, and management pursued, a 

variety of strategic initiatives aimed at 

(a) Ensuring that obligations to 

policyholders would continue to be met, 

(b) raising significant amounts of new 

capital, (c) increasing liquidity and risk 

based capital at SBL, and (d) obtaining 

an investment grade financial strength 

rating from the rating agencies. Potential 

capital raising initiatives included, 

among other things, reinsurance 

transactions and other strategic 

combinations, the sale of various MHC 

subsidiaries and affiliates, and a merger 

or demutualization of MHC. MHC’s 

Board of Directors also considered the 

viability of retaining MHC’s current 

structure. 

10. At the time, the Kansas Insurance 

Department had been closely 

monitoring SBL’s financial condition 

and efforts to secure additional capital, 

in order to determine whether 

regulatory action was warranted or 

required. Based on the results of the 

strategic initiatives, and following 

discussions with the Kansas Insurance 

Department, MHC’s Board of Directors 

determined that it would not be possible 

to secure the significant capital infusion 

needed by SBL to ensure that the 

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4On Monday, August 2, 2010, three days after the 

closing of the Transaction, S&P improved its 

financial strength rating on SBL and its affiliate to 

‘‘BBB+’’ from ‘‘BB+’’ and issued a positive outlook 

report. 

5Sections 40–4001 and 40–4003a(c)(5) of the 

Kansas Insurance Code provide the Commissioner 

with the authority to apply this framework to the 

demutualization of a mutual holding company. 

company would not become subject to 

regulatory action while maintaining the 

current mutual holding company 

structure. 

11. On December 23, 2009, MHC and 

its direct wholly-owned subsidiary, 

SBC, entered into a non-binding letter 

agreement (the Letter Agreement) with 

Guggenheim Partners, LLC 

(Guggenheim), an unrelated party, 

contemplating the following plan: (a) 

An interim recapitalization of SBL; and 

(b) MHC’s sale of SBC to an investor 

group led by Guggenheim (the 

Acquisition) and the concurrent 

Demutualization and dissolution (the 

Dissolution) of MHC. The 

Demutualization and Dissolution, 

together with the Acquisition, are 

cumulatively referred to herein as the 

‘‘Transaction.’’ On February 15, 2010, 

MHC, SBC and an investment vehicle 

for the investor group led by 

Guggenheim, Guggenheim SBC 

Holdings, LLC (the Investor), entered 

into a purchase and sale agreement (the 

Purchase and Sale Agreement) which 

superseded the Letter Agreement, 

pursuant to which (a) on February 25, 

2010, SBC received $175 million from 

the Investor in the form of a loan in 

exchange for a secured note, and 

contributed the $175 million as capital 

to SBL (the Interim Recapitalization); (b) 

assuming that the Demutualization and 

Dissolution occurred as contemplated, 

the loan and all accrued interest thereon 

would be automatically converted into 

equity in SBC, and SBL would receive, 

through SBC, up to approximately $175 

million in additional capital from the 

Investor at the closing of the 

Acquisition; (c) MHC would transfer all 

of SBC’s issued and outstanding shares 

to the Investor; (d) Eligible Members 

would as a group, subject to any claims 

against MHC and certain conditions 

described herein, receive, in addition to 

increased capitalization of SBL, up to 

$20 million in cash or Policy Credits 

upon the extinguishment of their 

Membership Interests in MHC in the 

Demutualization and Dissolution; and 

(e) funds invested by the Investor would 

pay for the transaction expenses 

incurred by MHC, SBC and SBL. 

Thereafter, on or after the effective date 

of the Demutualization and Dissolution, 

MHC would dissolve. 

12. The Kansas Insurance Department 

was actively monitoring the 

development of the Transaction, 

including the Letter Agreement, the 

Purchase and Sale Agreement and the 

D&D Plan. According to the Applicants, 

if MHC was unable to consummate the 

Transaction, MHC would be unable to 

ensure that the Kansas Insurance 

Department would not take regulatory 

action. 

13. The Applicants note that MHC’s 

Board of Directors believed that the 

Transaction would significantly 

improve SBL’s financial condition. The 

Applicants explain that SBL’s improved 

financial condition would allow SBL to 

mitigate current capital and regulatory 

concerns and permit SBL to operate 

with a stronger capital position, better 

prospects, higher financial strength 

ratings, and greater assurance that it will 

fulfill its obligations to its 

policyholders. In that regard, S&P 

improved its financial strength rating on 

SBL, first to ‘‘BB,’’ credit watch positive 

(from credit watch negative), upon 

announcement of the Transaction, and 

then to ‘‘BB+,’’ credit watch positive, 

upon completion of the Interim 

Recapitalization. S&P had further 

indicated that it could upgrade SBL to 

as high as ‘‘BBB+’’ upon closing of the 

Transaction.4 In addition to 

strengthening the capital and surplus of 

SBL, the Applicants suggest that the 

cash or Policy Credits totaling up to $20 

million in the aggregate, to be provided 

to Eligible Members upon the 

extinguishment of their otherwise 

illiquid Membership Interests, would 

enable Eligible Members to realize 

economic value from their Membership 

Interests that was not otherwise 

available to them. 

14. The Applicants note that the 

Transaction proceeded on a more 

expedited basis than is typical of most 

demutualizations, because of SBL’s 

precarious financial condition. 

According to the Applicants, MHC’s 

Board of Directors determined that an 

expedited process was essential in order 

to avoid SBL becoming subject to 

regulatory action, thereby imperiling 

SBL’s obligations to its policyholders. 

Furthermore, the Applicants state that 

the Board of Directors of MHC was 

concerned that, as time progressed, and 

SBL’s financial situation worsened, it 

would be more difficult to effect the sale 

of SBL to a third party, such as 

Guggenheim. 

Regulatory Supervision 

15. Article 40 of Chapter 40 of the 

Kansas Insurance Code provides a 

procedural and substantive framework 

for the demutualization and dissolution 

of a mutual holding company.5 Under 

Section 40–4002(a) of the Kansas 

Insurance Code, the board of directors of 

the insurer, by two-thirds majority, must 

(a) Adopt a resolution stating the reason 

why the demutualization will benefit 

the insurer and be in the best interests 

of its policyholders, and (b) approve a 

plan of demutualization. Pursuant to 

Section 40–4002(b) of the Kansas 

Insurance Code, a draft of the plan of 

demutualization may be submitted to 

the Commissioner for preliminary 

examination and comment prior to or 

after the adoption of the resolution. In 

addition, the Commissioner is permitted 

to retain experts in connection with its 

review at the expense of the insurer, 

pursuant to Section 40–4013 of the 

Kansas Insurance Code. 

After the completion of the process of 

preliminary examination and comment 

and finalization of any revisions 

requested by the Commissioner, the 

plan of demutualization is submitted to 

the Commissioner for written approval. 

The plan of demutualization shall not 

become effective unless it is approved 

by the Commissioner pursuant to 

Section 40–4002(c) of the Kansas 

Insurance Code. 

Among other requirements, the 

Commissioner’s approval is subject to a 

finding that the plan of demutualization 

is fair and equitable to the 

policyholders, pursuant to Section 40– 

4004(a)(1) of the Kansas Insurance Code. 

This provision also requires the 

Commissioner to order a hearing on the 

plan of demutualization, conducted in 

accordance with the Kansas 

Administrative Procedure Act, for 

which the Commissioner will provide 

no less than twenty days written notice 

to the insurer and the policyholders (by 

publication or otherwise). 

The plan of demutualization must be 

voted on by those policyholders who 

were policyholders of the mutual 

insurer on the day the plan of 

demutualization is initially approved by 

the board of directors of the mutual 

insurer, pursuant to Section 40–4002(d) 

and (g) of the Kansas Insurance Code. 

To be effective, the plan of 

demutualization must receive approval 

of two-thirds of those policyholders 

voting in person or by proxy at a 

meeting of the policyholders called for 

that purpose, pursuant to the bylaws of 

the insurer, except that if a majority of 

all the policyholders vote in person or 

by proxy, then approval by a majority of 

those voting shall constitute approval of 

the plan of demutualization, in 

accordance with Section 40–4002(d) of 

the Kansas Insurance Code. 

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6Article 33 of the Kansas Insurance Code governs 

insurance holding companies. 

7Section 40–3304 of the Kansas Insurance Code 

provides that a domestic insurer, including any 

person controlling a domestic insurer, shall not be 

the target of an acquisition, take-over or merger 

unless the Commissioner approves such action 

following a hearing conducted in accordance with 

the Kansas Administrative Procedure Act. 

8Members who held policies with SBL that were 

in force as of March 2, 2010, the date on which the 

D&D Plan was adopted, were eligible to vote on the 

D&D Plan. 

9According to the Applicants, as provided by the 

D&D Plan, individuals having a claim of any kind 

were afforded an opportunity to file proof of such 

claim with the Kansas Insurance Department and 

MHC by May 4, 2010. As part of the 

Commissioner’s approval of the D&D Plan, the 

Commissioner found the one claim submitted to be 

invalid. As a result, the Applicants state that the 

contemplated Total Aggregate Consideration will 

likely equal $20 million. 

10 ‘‘The proceeds of the demutualization will 

belong to the plan if they would be deemed to be 

owned by the plan under ordinary notions of 

property rights. See ERISA Advisory Opinion 92– 

02A, January 17, 1992 (assets of plan generally are 

to be identified on the basis of ordinary notions of 

property rights under non-ERISA law). It is the view 

of the Department that, in the case of an employee 

welfare benefit plan with respect to which 

participants pay a portion of the premiums, the 

appropriate plan fiduciary must treat as plan assets 

the portion of the demutualization proceeds 

attributable to participant contributions. In 

determining what portion of the proceeds are 

attributable to participant contributions, the plan 

fiduciary should give appropriate consideration to 

those facts and circumstances that the fiduciary 

knows or should know are relevant to the 

determination, including the documents and 

instruments governing the plan and the proportion 

of total participant contributions to the total 

premiums paid over an appropriate time period. In 

the case of an employee pension benefit plan, or 

where any type of plan or trust is the policyholder, 

or where the policy is paid for out of trust assets, 

it is the view of the Department that all of the 

proceeds received by the policyholder in 

connection with a demutualization would 

constitute plan assets.’’ See ERISA Advisory 

Opinion 2001–02A, February 15, 2001. 

The meeting for approval of the plan 

of demutualization by the policyholders 

must be called by a majority of the 

board of directors, the chairperson of 

the board or the president, pursuant to 

Section 40–4005 of the Kansas 

Insurance Code. That provision also 

requires notice of the meeting to be 

accompanied by a copy of the plan of 

demutualization and such other 

information the Commissioner deems 

necessary to policyholder 

understanding, including a summary of 

the plan of demutualization in a form 

approved by the Commissioner. 

16. Consistent with the requirements 

of the relevant portions of Articles 33 6

and 40 of Chapter 40 of the Kansas 

Insurance Code, on March 2, 2010, 

MHC’s Board of Directors unanimously 

(a) adopted a resolution approving the 

Demutualization and Dissolution of 

MHC and (b) approved and adopted the 

D&D Plan. The D&D Plan was submitted 

to the Commissioner for preliminary 

examination and comment in February 

2010 and again in March 2010. On 

March 30, 2010, MHC’s Board of 

Directors adopted a resolution 

approving and adopting the amended 

and restated D&D Plan, and they 

formally filed such plan with the 

Commissioner, for written approval, on 

March 31, 2010. In connection with her 

review of the D&D Plan, the 

Commissioner retained actuarial, 

financial, and legal advisors. 

17. On March 31, 2010, at least 20 

days in advance of the Public Comment 

Meeting to be held by the 

Commissioner, MHC provided each 

Eligible Member with a copy of the 

Security Benefit Member Information 

Booklet (MIB), describing in detail the 

transactions described herein. The 

Commissioner held the Public Comment 

Meeting on April 28, 2010, during 

which statements, questions, and 

comments were invited to be heard, but 

none were offered. 

18. In addition to the D&D Plan, the 

Acquisition was subject to the approval 

of the Commissioner.7 The 

Commissioner held an evidentiary 

hearing regarding the D&D Plan and the 

Transaction on May 5, 2010. At the 

hearing, the Commissioner incorporated 

all evidence, including exhibits 

submitted in support of the Transaction, 

into the record, and further announced 

that the record would remain open until 

May 11, 2010, to admit additional 

materials and statements. Subsequently, 

on May 18, 2010, based on its review of 

the record, the Commissioner issued an 

order approving the Transaction, subject 

to MHC’s receipt of the required 

approval of its members to demutualize 

and dissolve. 

19. A special meeting of the Members 

for approving the D&D Plan was called 

by the chairman of MHC’s board of 

directors and took place on May 26, 

2010. Each Member entitled to vote was 

entitled to only one vote regardless of 

the number of policies or amount of 

insurance and benefits held by or issued 

to the Member. According to the 

Applicants, there were approximately 

190,784 Members eligible to vote on the 

D&D Plan.8 According to the 

Applicants, of those members voting, 

approximately 90 percent voted in favor 

of the Plan. On July 30, 2010, the 

Transaction closed, and $165 million of 

capital was injected into SBL following 

an initial $175 million infusion on 

February 25, 2010. 

20. The Applicants represent that any 

act or determination undertaken by an 

Eligible Member that was a Plan with 

respect to attending and/or submitting 

comments for the Commissioner’s 

public comment meeting and/or 

evidentiary hearing, attending MHC’s 

special meeting to consider the D&D 

Plan, and/or voting on the D&D Plan, 

was made by one or more Plan 

fiduciaries that were independent of 

SBL and its affiliates, and neither SBL 

nor any of its affiliates provided 

investment advice within the meaning 

of 29 CFR 2510.3–21(c) or exercised 

investment discretion with respect to 

such act or determination. 

Distributions to Eligible Members 

21. As noted above, and as outlined 

in the D&D Plan, the Investor made 

available $20 million for payment as 

Consideration to Eligible Members, 

provided, however, that this 

Consideration would be reduced by any 

claims against MHC in excess of 

$500,000 in the aggregate that were not 

otherwise paid or provided for, with the 

remainder paid as consideration to 

Eligible Members upon the 

extinguishment of their Membership 

Interests (such remainder, the Total 

Aggregate Consideration).9 The cash 

portion of the Total Aggregate 

Consideration was distributed by check 

to Eligible Members entitled to receive 

cash payments, in accordance with the 

D&D Plan. In addition, pursuant to the 

D&D Plan, the Investor delivered the 

Policy Credit funding portion of the 

Total Aggregate Consideration to SBL, 

for crediting Policy Credits to Eligible 

Members entitled to be credited Policy 

Credits.10

22. The Applicants state that, 

pursuant to the D&D Plan, upon the 

extinguishment of their Membership 

Interests, Eligible Members had the 

opportunity to receive, in addition to 

the benefits of SBL’s capital and surplus 

being strengthened, their share of the 

Total Aggregate Consideration. The 

Applicants represent that the 

Transaction did not diminish the 

benefits, values, guarantees and 

dividend eligibility of the Members’ 

policies, nor did it change the premiums 

for such policies; however, the 

Transaction did extinguish the 

Membership Interests. 

23. As described above, the D&D Plan 

provided Eligible Members whose 

Membership Interests were extinguished 

by the Transaction with Consideration 

in the form of cash or Policy Credits. 

The D&D Plan provides that, for this 

purpose, (a) ‘‘Eligible Member’’ means 

the owner of an Eligible Policy, (b) 

‘‘Eligible Policy’’ generally means a 

policy that was in force as of the close 

of business on March 2, 2010, the date 

that the D&D Plan was initially adopted 

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11According to the Applicants, the IRS takes the 

position that a mutual insurance company’s 

payment of cash consideration to the holder of a 

tax-qualified retirement contract in connection with 

the company’s demutualization could have adverse 

tax consequences for the holder, including income 

taxation on the proceeds, excise tax penalties, and 

potential disqualification of the contract from 

favorable tax treatment. However, the IRS has 

issued a number of private letter rulings in the 

context of prior demutualization transactions 

holding that policy credits can be used to 

compensate holders of tax-qualified retirement 

contracts for the extinguishment of their 

membership interests in a demutualization 

transaction without negatively affecting the taxfavored status of the contract. See, e.g., PLR 

200820009 (May 16, 2008); PLR 200240051 

(October 4, 2002); PLR 200132033 August 13, 2001); 

PLR 200124001 (June 18, 2001); PLR 200011035 

(March 20, 2000); PLR 9512021 (December 29, 

1994); and PLR 9230033 (February 4, 1992) 

(involving conversions of mutual holding 

companies as well as mutual insurance companies). 

Furthermore, the Applicants explain, in situations 

in which a tax-qualified retirement contract is held 

in a section 401(a) qualified trust, the IRS considers 

the membership interest to be held in the trust, 

which may receive consideration other than policy 

credits without experiencing adverse tax 

consequences. 

12However, cash was paid to an Eligible Member 

who held an Eligible Policy that was a 

supplementary contract or a settlement option 

issued pursuant to an Eligible Policy on or before 

the effective date of the D&D Plan and to effect the 

annuitization of an individual deferred annuity, an 

immediate annuity contract or a deferred annuity 

contract in the period following deferment of 

annuity payments, if SBL determined that such 

cash was not subject to excise tax and did not 

constitute a prohibited transaction under the Code 

or cause a disqualification of the policy, or a related 

plan, in respect of which the cash was issued. 

13The Applicants represent that the Escrow 

Arrangement was established with Deutsche Bank 

Trust Company Americas, a subsidiary of Deutsche 

Bank AG. The Applicants further represent that SBL 

has no ownership affiliation or other material 

relationship to Deutsche Bank Trust Company 

Americas. 

14The IRS Rulings were issued on December 20, 

2010. 

by MHC’s Board of Directors, unless the 

policy is excluded pursuant to the terms 

of the D&D Plan, and (c) ‘‘Policy Credit’’ 

means Consideration to be paid in the 

form of an increase in cash value, 

account value, dividend accumulations 

or benefit payment, as appropriate, 

depending upon the policy. 

24. Each Eligible Member was 

allocated only a fixed component of 

Consideration in an amount determined 

by dividing the Total Aggregate 

Consideration by the total number of 

Eligible Members. The Applicants note 

that no Eligible Member received any 

variable component of Consideration, 

and neither MHC nor any of its 

subsidiaries were Eligible Members with 

respect to any policy owned by any of 

them. 

25. Pursuant to the D&D Plan, 

Consideration was generally paid to 

Eligible Members in cash; however, 

Consideration was paid by the crediting 

of Policy Credits, and not in cash, to 

each Eligible Member who owned an 

Eligible Policy that was in force and not 

in payout status on the date that the 

Consideration was distributed and was 

held, other than through a trust,11 in one 

of the following forms of Tax-Qualified 

Contracts: 

(a) An annuity contract that qualifies 

for the treatment described in section 

403(b) of the Code; 

(b) An individual retirement annuity 

within the meaning of section 408(b) of 

the Code; 

(c) An individual annuity contract or 

an individual life insurance policy 

issued directly to a plan participant 

pursuant to a plan qualified under 

section 401(a) or section 403(a) of the 

Code; 

(d) A group annuity contract issued to 

an employer, designed to fund benefits 

under a retirement plan sponsored by 

the employer that qualifies under 

section 401(a) or section 403(a) of the 

Code; 

(e) An annuity contract issued in 

connection with a plan established by a 

governmental entity that qualifies for 

the treatment described in section 457 

of the Code; or 

(f) Any other form of contract MHC 

determined must receive Policy Credits 

in order to retain the contract’s taxfavored status.12

26. In addition, Policy Credits were 

paid to an Eligible Member in the event 

that SBL determined that payment of 

Consideration in the form of cash would 

be disadvantageous to such Eligible 

Member in respect of applicable income 

or other taxation provisions. If an 

Eligible Member owned one or more 

Tax-Qualified Contracts and one or 

more other Eligible Policies, 

Consideration was credited to one of the 

Eligible Member’s Tax-Qualified 

Contracts or Eligible Policies, as 

determined by SBL in accordance with 

operational rules established by SBL for 

allocating Consideration among one or 

more of such contracts. According to the 

Applicants, these rules were intended to 

be fixed rules that eliminate discretion 

in their application, and the overriding 

goal of the rules was to protect Eligible 

Members from adverse tax 

consequences. 

27. The Applicants represent that, 

with regard to any determination made 

by SBL whether an Eligible Member 

would receive cash or Policy Credits, 

described above, the form of 

Consideration to be received by an 

Eligible Member was determined by 

SBL based on objective criteria, 

including the tax-qualification status of 

the Eligible Policy, whether the Eligible 

Policy was in payout status, and the 

number and type of Eligible Policies 

held by the Eligible Member. 

Furthermore, the Applicants state that, 

in order to ensure consistent application 

and the absence of any discretion in 

making these determinations, such 

criteria were set forth in written 

operating rules. 

28. Under the D&D Plan, and except 

as described below, as soon as 

reasonably practicable and no more than 

60 days following the effective date of 

the D&D Plan (i.e., July 30, 2010), unless 

otherwise approved by the 

Commissioner, (a) SBL or, if applicable 

and with funds transferred by SBL, any 

company to which SBL reinsured or 

coinsured any Eligible Policy, credited 

Policy Credits to the Eligible Members 

that were entitled to be credited Policy 

Credits under the D&D Plan and (b) 

MHC, SBC, SBL or a bank or trust 

company (or such other entity) 

designated by MHC and that was 

reasonably acceptable to the Investor 

distributed cash, by check, net of any 

required withholdings, to the Eligible 

Members that were entitled to receive 

such cash. The Applicants state that no 

interest was payable on the 

Consideration and no Eligible Member 

paid any commissions or fees in 

connection with the receipt of the 

Consideration. 

The Escrow Arrangement 

29. The D&D Plan further provided 

that, if an exemption from the 

Department had not been granted prior 

to the effective date of the Transaction 

(i.e., July 30, 2010), MHC and SBL 

would delay distribution of 

Consideration to Eligible Members that 

were Plans and place the Consideration 

in an escrow, trust, or similar 

arrangement (i.e., the Escrow 

Arrangement) 13 until the earlier of (a) 

the date the exemption was granted in 

form and substance satisfactory to SBL 

(or, if later and applicable to the Eligible 

Member, the date that private letter 

rulings from the IRS related to the 

distribution of Policy Credits to Eligible 

Members holding Tax-Qualified 

Contracts (the IRS Rulings) were 

obtained in form and substance 

satisfactory to SBL),14 (b) December 31, 

2010, or (c) such later date as may be 

required by the Commissioner (i.e., June 

30, 2011, see Representation 34). The 

D&D Plan further provided that, once 

the exemption was granted in form and 

substance satisfactory to SBL, the 

Consideration held in the Escrow 

Arrangement would be distributed, 

without interest, to the Eligible 

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Federal Register / Vol. 76, No. 12 / Wednesday, January 19, 2011 / Notices 3173 

15The Applicants state that the amount of 

Consideration allocable to each Eligible Member is 

approximately $100, and any interest on such 

amount would constitute cents on the dollar. 

16The Applicants maintain that revised 

calculation requirements, additional tax reporting 

requirements, and allocation issues all could arise 

as a result of requiring the crediting of interest on 

Consideration held in escrow. 

17As noted in footnote 13, the IRS Rulings were 

issued on December 20, 2010, prior to the 

occurrence of the December 31, 2010 deadline. 

Members that were Plans unless those 

Eligible Members had been allocated 

Consideration that was subject to further 

delay associated with the IRS Rulings. 

SBC or its affiliates would bear all costs 

and expenses of maintaining the Escrow 

Arrangement. 

30. According to the Applicants, if 

Eligible Members holding contracts 

subject to the Act (ERISA Contracts) or 

Tax-Qualified Contracts were paid 

Consideration without having received 

the exemption or IRS Rulings, adverse 

consequences could result, including 

the imposition of prohibited transaction 

excise taxes under section 4975 of the 

Code, unanticipated taxes on 

distributions (including additional taxes 

under section 72(t) of the Code, excise 

taxes and withholding penalties) and 

the potential disqualification of Eligible 

Members that were Plans. Thus, the 

Applicants contend that the Escrow 

Arrangement was necessary because the 

delivery of Consideration to Eligible 

Members was not made contingent upon 

the receipt of the exemption or the IRS 

Rulings. The Applicants explain that, 

because time was of the essence in 

closing the Transaction, MHC could not 

plan for every contingency, such as the 

receipt of the exemption and the IRS 

Rulings. 

As noted above, MHC was cognizant 

of SBL’s precarious financial situation 

and its need to secure a capital infusion 

resulting from the Acquisition. In 

addition, MHC was concerned that the 

Investor would abandon its plans to 

purchase SBC, and the Kansas Insurance 

Department would intervene to take 

regulatory action, if the Transaction was 

not consummated quickly. 

Consequently, the Transaction closed on 

July 30, 2010, and the Escrow 

Arrangement was utilized to avoid the 

potential adverse consequences flowing 

from the receipt of Consideration by 

Eligible Members holding ERISA 

Contracts or Tax-Qualified Contracts in 

advance of the receipt of the exemption 

or the IRS Rulings. 

31. The Applicants further contend 

that no interest should be required to be 

paid on any form of Consideration held 

in the Escrow Arrangement, primarily 

because the amount of interest would be 

de minimis as to each such Eligible 

Member.15 Moreover, the Applicants 

suggest that the costs associated with 

calculating and adding the interest to 

the Consideration would offset any 

benefit to be derived from the interest 

payment.16

32. The D&D Plan also provides, in 

Section 5.4, that, if the exemption is not 

granted in form and substance 

satisfactory to SBL on or before 

December 31, 2010 (or such later date as 

may be required by the Commissioner), 

the Consideration held in the Escrow 

Arrangement shall be released to the 

general account of SBL, and Eligible 

Members that are Plans and otherwise 

entitled to receive Consideration under 

the D&D Plan in respect of their TaxQualified Contracts or ERISA Contracts, 

as the case may be, will receive no 

Consideration in connection with the 

Transaction. 

33. According to the Applicants, the 

December 31, 2010 deadline for receipt 

of the IRS Rulings or the exemption 

constitutes a ‘‘failsafe’’ mechanism, in 

that it is designed to protect Plans from 

potential adverse tax consequences or 

disqualification in the event that 

Consideration is paid to Eligible 

Members holding Tax-Qualified 

Contracts or ERISA Contracts without 

the requisite regulatory approvals. 

According to the Applicants, the benefit 

of receiving the Consideration would be 

small (approximately $100 per Eligible 

Member) in comparison to the risk of 

adverse tax consequences, plan 

disqualification, and other penalties, if 

MHC failed to secure the proper 

regulatory approvals for the 

Transaction. Furthermore, the 

Applicants claim that there was a 

probability that only the exemption or 

the IRS Rulings would be approved (but 

not the other), thereby creating a ‘‘catch22’’ where Consideration could neither 

be paid to Eligible Members nor kept in 

the Escrow Arrangement indefinitely. 

Instead, the Applicants suggest that 

Eligible Members would be better 

served in having Consideration flow to 

SBL for the benefit of SBL’s 

policyholders, generally. 

34. Furthermore, the Applicants 

explain that, at the time that the D&D 

Plan was approved, MHC believed, 

based on past precedents, that the 

December 31, 2010 ‘‘failsafe’’ date would 

allow adequate time for full 

consideration of the applications by the 

IRS and the Department. They also 

contend that Members assented to the 

inclusion of the failsafe provisions in 

the D&D Plan when they approved the 

D&D Plan after full consideration of its 

terms, including having had the 

opportunity to review the MIB, to 

deliberate and vote on the D&D Plan, 

and to submit comments to the 

Commissioner through various formal 

processes. Furthermore, the Applicants 

note that the Commissioner approved of 

the December 31, 2010 deadline and 

failsafe provisions as fair and equitable 

and represented in writing to the 

Department that she would extend the 

deadline by at least six months if MHC 

had not secured the IRS Rulings or 

exemption by December 31, 2010. 

35. The Department concurs with the 

Applicants that the increased 

complexity and administrative cost 

involved with paying interest on such 

Consideration, together with the small 

amount of Consideration allocable to 

each Eligible Member, outweigh the 

benefit in receiving nominal interest on 

such Consideration. 

36. In addition, the Department 

understands that administrative 

impracticalities inherent in holding 

Consideration in the Escrow 

Arrangement for a period of time, prior 

to receipt of the exemption and the IRS 

Rulings, may have provided sufficient 

rationale for the failsafe provisions. 

However, the Department views the 

failsafe mechanism in the D&D Plan as 

a forfeiture of plan assets and as 

contrary to the protections afforded to 

plan assets and the parties who are 

entitled to such assets under the Act. 

Moreover, the Department believes that 

such failsafe mechanism, if employed, 

would fail to satisfy Section II(h) of the 

proposed exemption, which provides 

that Eligible Members that were Plans 

participated in the Demutualization on 

the same basis as other Eligible 

Members that were not Plans, and 

Section II(l) of the proposed exemption, 

which prohibits the forfeiture of 

Consideration. However, because the 

Commissioner has agreed to extend the 

December 31, 2010 deadline for an 

additional 6 months, the Department 

notes that it is likely that the exemption 

will be granted prior to such date.17

Therefore, the forfeiture of the 

Consideration in the Escrow 

Arrangement and its associated 

prohibited transaction implications 

should not arise. 

Merits of the Transaction 

37. As previously discussed, the 

Applicants assert that the Transaction 

will significantly improve SBL’s 

financial condition, which will allow 

SBL to mitigate current capital and 

regulatory concerns and permit SBL to 

operate with a stronger capital position, 

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3174 Federal Register / Vol. 76, No. 12 / Wednesday, January 19, 2011 / Notices 

better prospects, higher financial 

strength ratings and greater assurance 

that it will fulfill its obligations to its 

policyholders. Therefore, according to 

the Applicants, SBL’s policyholders, 

including those policyholders that are 

Plans, will derive a significant benefit 

from the Transaction. 

38. Furthermore, the Applicants note 

that, as part of the Transaction and 

pursuant to the D&D Plan, Eligible 

Members, including Plans, also had the 

opportunity to receive Consideration in 

the form of cash or Policy Credits upon 

the extinguishment of such Eligible 

Members’ Membership Interests. These 

Membership Interests, note the 

Applicants, were not transferable and 

had no value independent of the 

policies to which they were attributable. 

Therefore, the Applicants maintain, 

absent the Consideration payable under 

the D&D Plan, Eligible Members 

received no remuneration for their 

Membership Interests in the 

Demutualization. 

Moreover, the Applicants declare that 

the D&D Plan will not diminish the 

benefits, values, guarantees and 

dividend eligibility of the Members’ 

policies, nor will it change the 

premiums for such policies. 

Summary 

39. In summary, the Applicants 

represent that the Transaction satisfied 

or will satisfy the statutory criteria for 

an exemption under section 408(a) of 

the Act because: 

(a) The D&D Plan was implemented in 

accordance with procedural and 

substantive safeguards that were 

imposed under the laws of the State of 

Kansas and was subject to review, 

approval, and supervision by the 

Commissioner. 

(b) The Commissioner reviewed the 

terms that were provided to Eligible 

Members as part of such 

Commissioner’s review of the D&D Plan, 

and the Commissioner approved the 

D&D Plan following a determination 

that such D&D Plan was fair and 

equitable to all Eligible Members. 

(c) Each Eligible Member had an 

opportunity to comment on the D&D 

Plan at the Commissioner’s public 

comment meeting or evidentiary hearing 

on the D&D Plan. 

(d) Each Eligible Member had an 

opportunity to vote to approve the D&D 

Plan after full written disclosure was 

given to the Eligible Members by MHC. 

(e) Pursuant to the D&D Plan, an 

Eligible Member generally received 

cash, except that an Eligible Member 

received Policy Credits, and not cash, to 

the extent that— 

(1) Consideration was allocable to the 

Eligible Member based on ownership of 

a Tax-Qualified Contract; or 

(2) SBL made an objective 

determination that payment of 

Consideration in the form of cash would 

be disadvantageous to such Eligible 

Member in respect of applicable income 

or other taxation provisions. 

(f) Any determination made by SBL 

under Paragraphs (e)(1) or (e)(2) of 

Section II of the proposed exemption 

was based upon objective criteria that 

was applied consistently to similarly 

situated Eligible Members. 

(g) Any act or determination 

undertaken by an Eligible Member that 

was a Plan with respect to attending 

and/or submitting comments for the 

Commissioner’s public comment 

meeting and/or evidentiary hearing, 

attending MHC’s special meeting to 

consider the D&D Plan, and/or voting on 

the D&D Plan, was made by one or more 

Plan fiduciaries that were independent 

of SBL and its affiliates, and neither SBL 

nor any of its affiliates provided 

investment advice within the meaning 

of 29 CFR 2510.3–21(c) or exercised 

investment discretion with respect to 

such act or determination. 

(h) All Eligible Members that were 

Plans participated in the 

Demutualization on the same basis as all 

other Eligible Members that were not 

Plans. 

(i) No Eligible Member paid any 

brokerage commissions or fees in 

connection with the receipt of Policy 

Credits. 

(j) All of SBL’s policyholder 

obligations remained in force and were 

not affected by the D&D Plan. 

(k) The terms of the Demutualization 

were at least as favorable to the Plans as 

the terms of an arm’s length transaction 

between unrelated parties. 

(l) Any Plan Eligible Member whose 

Consideration was placed in the Escrow 

Arrangement, pursuant to the D&D Plan, 

will receive a distribution of such 

Consideration from the Escrow 

Arrangement and will not forfeit such 

Consideration. 

(m) SBL complied with and will 

continue to comply with, the 

recordkeeping requirements provided 

herein to enable certain authorized 

persons to determine whether the 

conditions of the exemption have been 

met, for so long as such records are 

required to be maintained. 

FOR FURTHER INFORMATION CONTACT: 

Warren Blinder of the Department, 

telephone (202) 693–8553. (This is not 

a toll-free number.) 

General Information 

The attention of interested persons is 

directed to the following: 

(1) The fact that a transaction is the 

subject of an exemption under section 

408(a) of the Act and/or section 

4975(c)(2) of the Code does not relieve 

a fiduciary or other party in interest or 

disqualified person from certain other 

provisions of the Act and/or the Code, 

including any prohibited transaction 

provisions to which the exemption does 

not apply and the general fiduciary 

responsibility provisions of section 404 

of the Act, which, among other things, 

require a fiduciary to discharge his 

duties respecting the plan solely in the 

interest of the participants and 

beneficiaries of the plan and in a 

prudent fashion in accordance with 

section 404(a)(1)(b) of the Act; nor does 

it affect the requirement of section 

401(a) of the Code that the plan must 

operate for the exclusive benefit of the 

employees of the employer maintaining 

the plan and their beneficiaries; 

(2) Before an exemption may be 

granted under section 408(a) of the Act 

and/or section 4975(c)(2) of the Code, 

the Department must find that the 

exemption is administratively feasible, 

in the interests of the plan and of its 

participants and beneficiaries, and 

protective of the rights of participants 

and beneficiaries of the plan; 

(3) The proposed exemptions, if 

granted, will be supplemental to, and 

not in derogation of, any other 

provisions of the Act and/or the Code, 

including statutory or administrative 

exemptions and transitional rules. 

Furthermore, the fact that a transaction 

is subject to an administrative or 

statutory exemption is not dispositive of 

whether the transaction is in fact a 

prohibited transaction; and 

(4) The proposed exemptions, if 

granted, will be subject to the express 

condition that the material facts and 

representations contained in each 

application are true and complete, and 

that each application accurately 

describes all material terms of the 

transaction which is the subject of the 

exemption. 

Signed at Washington, DC, this 13th day of 

January 2011. 

Ivan Strasfeld, 

Director of Exemption Determinations, 

Employee Benefits Security Administration, 

U.S. Department of Labor. 

[FR Doc. 2011–974 Filed 1–18–11; 8:45 am] 

BILLING CODE 4510–29–P 

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